I am sure you have heard of Fannie Mae. But did you also know that Fannie Mae stock has completed a major topping pattern known as a head and shoulders top? Well it has and it could be the beginning of a long drawn out decline in this security.
Fannie Mae stock forms major 7 year top
The chart to the left on the surface might be somewhat plain looking on the surface but it is actually screaming a major warning signal for the whole real estate market. Why? Because the chart is indicating that Fannie Mae stock has completed a major 7 year distribution topping head and shoulders pattern and also broken down through the neckline of this pattern. Basically what this means to me is that Fannie Mae stock is now in a long-term downtrend officially as opposed to simple sideways consolidation. Usually price declines occur more quickly than price advances because fear is a much stronger emotion than greed.
Keep in mind though that Fannie Mae is definitely a slow moving beast in terms of price action. The new downtrend will likely take many years before any sort of new accumulation takes place. Also, keep in mind that while a head and shoulders topping pattern is one of the most reliable in terms of forecasting implications, it is not guaranteed to be right. I have seen some of the patterns fail at times. Jim Rogers, the well known investor – trader and all around financial guru has been quoted as saying he believes Fannie Mae will be a 10 dollar stock eventually. He is very bearish on Fannie Mae and on real estate in general I believe. By the way, Jim is also very bullish on commodities as well and even has a commodity index fund with industry beating performance. He wrote a bunch of good books on his thoughts on investing from an international perspective.
Years down the road when I reflect back on this post it sure will be interesting to see how everything played out. From what I have been hearing from ‘experts’ in the field, most do not believe that real estate will decline that much or too severely. The problem with that kind of forecast is that it is likely only based on linear thinking, or in other words, “because real estate has been trending up for so long and so smoothly, it should not decline too severely based on this historical precedent“. Admittedly, making a precise long term forecast on real estate is no easy task, especially when you consider that inflation is likely to be the dominant force over the next half dozen years. Interest rates are obviously the key here. A dramatic sustained rise in rates could be the ongoing catalyst that busts real estate.
The most recent daily price action on Fannie Mae is looking pretty bad. Weak reactions from support at 56 level. If 56 level breaks it could be the start of a pretty fast move to 44 where FNM will find support. If and when 45 breaks, then we would be dealing with a much more serious decline as there is very little support until about 13.
The home builders should be under pressure too as I indicated in a previous post.
March 11th 2005, the top is in for real estate!
Peace. I’m out.
tc.
P.S. I hope this article was not too depressing, especially if you are a homeowner. Relax. When one sector has trouble, there is always an opposite opportunity on the other side of the rainbow. You will hear me talking specifically what that sector is in the weeks and months ahead. Stay tuned.